Could an independent contractor avoid New Mexico gross receipts tax penalty and interest because her California enrolled agent never told her about the tax and she paid voluntarily after learning of it?

Plain-English summary

Pamela W. Kelly owed penalty and interest on four years of late gross receipts tax even though she paid voluntarily as soon as she discovered the obligation. Her California enrolled agent prepared federal and state income-tax returns but had no shown expertise in New Mexico gross receipts tax and had not been engaged to advise on it.

Kelly returned to New Mexico in 1999 and worked as an independent contractor for the Museum of New Mexico Foundation. She did not know that her service receipts were subject to New Mexico gross receipts tax.

Her California preparer was an enrolled agent licensed under a federal program to represent taxpayers before the Internal Revenue Service. Kelly told him that she had moved and asked him to prepare her income-tax returns and advise about state and federal income-tax liability.

The preparer did not know about New Mexico gross receipts tax, and they never discussed it.

Kelly learned about the tax from a co-worker in 2003. After consulting a New Mexico accountant, she voluntarily filed returns and paid the gross receipts tax for January 1999 through December 2002. The Department then assessed penalty and interest for late payment.

Voluntary correction did not remove interest

Section 7-1-67 made interest mandatory when tax was not paid on time. The decision explained that interest compensated the state for the period it lacked funds legally due.

Kelly acted promptly once she learned of the obligation, but the tax had remained unpaid from each original due date until her 2003 payments. Her lack of prior awareness did not authorize interest abatement.

The accountant-reliance exception did not apply

Section 7-1-69(A) imposed penalty when late payment resulted from negligence or disregard of rules and regulations. Regulation 3.1.11.10 NMAC included inaction, inadvertence, erroneous belief, and inattention.

Regulation 3.1.11.11 NMAC recognized that reasonable reliance on competent tax counsel or an accountant could indicate non-negligence when the taxpayer made full disclosure of relevant facts.

Kelly did not meet that standard. Her preparer had federal credentials but no demonstrated New Mexico tax-law expertise. She engaged him about income taxes, not gross receipts tax, and there was no evidence that she asked him to determine compliance with New Mexico's other tax laws.

The decision also held that a taxpayer could not delegate the basic responsibility to ascertain state tax consequences. Unintentional lack of knowledge still qualified as negligence under the cited New Mexico authority.

Result: protest DENIED. The assessed penalty and interest remained due.

What this means for you

Independent contractors moving to New Mexico

Ask specifically about gross receipts tax, registration, reporting periods, and the tax treatment of services. Income-tax preparation does not necessarily cover business-transaction taxes.

Taxpayers using an out-of-state preparer

Confirm the preparer's expertise in every New Mexico tax relevant to the business. Federal credentials alone did not establish state gross receipts tax competence here.

Taxpayers discovering an old obligation

Voluntary and prompt correction is important, but this decision did not treat it as an automatic waiver of statutory interest or negligence penalty.

Taxpayers relying on professional advice

Define the scope of the advice and disclose the relevant business facts. The reliance defense failed partly because gross receipts tax advice had never been requested.

Common questions

Q: What work did Kelly perform?
A: Independent-contractor services for the Museum of New Mexico Foundation.

Q: What periods did she voluntarily report?
A: January 1999 through December 2002.

Q: Was her preparer a CPA?
A: No. He was a federally enrolled agent.

Q: Why did reliance on him fail?
A: He had no shown New Mexico tax expertise and was engaged about income tax, not gross receipts tax.

Q: Did prompt voluntary payment eliminate interest?
A: No. Interest ran for the time the tax remained unpaid.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-67 — interest on late-paid tax
• NMSA 1978, § 7-1-69(A) — negligence penalty
• Regulation 3.1.11.10 NMAC — taxpayer negligence
• Regulation 3.1.11.11 NMAC — indicators of non-negligence

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Pamela W. Kelly
• Decision PDF: D&O 04-13

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
PAMELA W. KELLY No. 04-13
ID NO. 02-939717-00-0
ASSESSMENT NOS. 4103748-4103753;
4104147 and 4104148

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on August 30, 2004, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Lewis J. Terr, Special Assistant Attorney General. Pamela W. Kelly (“Taxpayer”)

represented herself. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer, who grew up in New Mexico, moved to California in 1987.

2. While in California, the Taxpayer used the services of a California accountant to

prepare her state and federal income tax returns.

3. The Taxpayer’s accountant was not a certified public accountant, but was an enrolled

agent under a federal program that licenses individuals to represent taxpayers before the Internal

Revenue Service.

4. In 1999, the Taxpayer moved back to New Mexico and began work as an

independent contractor performing services for the Museum of New Mexico Foundation.

5. The Taxpayer did not realize that she was required to pay New Mexico gross receipts

tax on her receipts from performing services as an independent contractor and did not report or pay

gross receipts tax on this income.

6. In early 2000, the Taxpayer mailed a copy of New Mexico’s personal income tax

instruction booklet to her accountant in California. The Taxpayer informed her accountant that she

was now a resident of New Mexico and asked him to prepare her income tax returns and advise her

of her state and federal tax liability.

7. The California accountant was not aware of the New Mexico gross receipts tax and

did not have any discussions with the Taxpayer concerning her liability for this tax.

8. In 2003, during a discussion with a co-worker, the Taxpayer learned of the existence

of the New Mexico gross receipts tax.

9. The Taxpayer consulted with a New Mexico accountant who advised her of her

liability for gross receipts tax on her earnings as an independent contractor.

10. After learning of her tax liability, the Taxpayer voluntarily filed returns and paid the

gross receipts tax due for reporting periods January 1999 through December 2002.

11. On July 25 and 28, 2003, the Department assessed the Taxpayer for penalty and

interest due on her late payment of gross receipts tax.

12. On September 3, 2003, pursuant to a retroactive extension of time granted by the

Department, the Taxpayer filed a written protest to the Department’s assessments.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for penalty and interest on her late

payment of gross receipts tax for reporting periods January 1999 through December 2002. The

Taxpayer asks the Department to excuse her from the payment of penalty and interest because she

relied on the advice of her accountant and because she voluntarily came forward to pay the taxes due

as soon as she discovered her liability.

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NMSA 1978, § 7-1-17 provides that any assessment of tax by the Department is presumed to

be correct. NMSA 1978, § 7-1-3 defines tax to include not only the amount of tax principal imposed

but also, unless the context otherwise requires, “the amount of any interest or civil penalty relating

thereto." See also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M.

795, 779 P.2d 982 (Ct. App. 1989). Accordingly, the assessment of penalty and interest paid by the

Taxpayer is presumed to be correct, and it is the Taxpayer’s burden to present evidence showing she

is entitled to an abatement of these amounts.

Assessment of Interest. NMSA 1978, § 7-1-67 governs the imposition of interest on late

payments of tax and provides, in pertinent part:

A. If a tax imposed is not paid on or before the day on which it becomes
due, interest shall be paid to the state on that amount from the first day
following the day on which the tax becomes due, without regard to any
extension of time or installment agreement, until it is paid... (emphasis
added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The assessment of

interest is not designed to punish taxpayers, but to compensate the state for the time value of unpaid

revenues. In this case, the Taxpayer failed to pay her gross receipts taxes in a timely manner because

she was unaware that tax was due. Although the Taxpayer acted promptly to correct her error once it

was discovered, the fact remains that the state was deprived of the use of funds to which it was

legally entitled during the period from the original due date of the tax until it was paid. For this

reason, interest was properly assessed pursuant to NMSA 1978, § 7-1-67.

Assessment of Penalty. NMSA 1978, § 7-1-69(A) imposes a penalty of two percent per

month, up to a maximum of ten percent, whenever a taxpayer fails “due to negligence or disregard of

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rules and regulations” to pay taxes or file required tax reports in a timely manner. Taxpayer

negligence for purposes of assessing penalty is defined in Regulation 3.1.11.10 NMAC as:

A. failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;

B. inaction by taxpayers where action is required;

C. inadvertence, indifference, thoughtlessness, carelessness, erroneous
belief or inattention.

Regulation 3.1.11.11 NMAC sets out several situations that may indicate a taxpayer has not been

negligent, including instances where the taxpayer proves that the failure to pay tax “was caused by

reasonable reliance on the advice of competent tax counsel or accountant as to the taxpayer’s

liability after full disclosure of all relevant facts.”

In this case, the Taxpayer argues that she was not negligent because her accountant failed to

advise her that gross receipts tax was due on her earnings as an independent contractor. The

Taxpayer’s accountant was an enrolled agent licensed to represent taxpayers before the Internal

Revenue Service. While enrolled agents are generally knowledgeable about federal taxes, there is no

indication that the Taxpayer’s out-of-state accountant had any expertise in New Mexico’s tax laws or

had been engaged to determine whether the Taxpayer was in compliance with those laws. Instead,

the evidence shows that the Taxpayer asked her accountant to advise her concerning her state and

federal income tax liability.

A taxpayer’s responsibility for payment of taxes due to the state cannot be delegated to a

third party. As the Court of Appeals held in El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989):

"[e]very person is charged with the reasonable duty to ascertain the
possible tax consequences of his action [or inaction]." Tiffany Constr. Co.
v. Bureau of Revenue, 90 N.M. at 17, 558 P.2d at 1156. We are not

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inclined to hold that the taxpayer can abdicate this responsibility merely
by appointing an accountant as its agent in tax matters.

Here, the Taxpayer’s reliance on her California accountant to prepare her state and federal income tax

returns does not establish a basis for abating the negligence penalty for failure to pay gross receipts tax.

Although the reporting error was due to the Taxpayer’s lack of knowledge of New Mexico tax law, and

not to any intent to cheat the state, New Mexico courts have held that even inadvertent error constitutes

negligence for purposes of § 7-1-69. See, El Centro Villa Nursing Center v. Taxation & Revenue

Department, 108 N.M. 795, 797, 779 P.2d 982, 984 (Ct. App. 1989) (§ 7-1-69(A) is designed specifi-

cally to penalize unintentional failure to pay tax.). For this reason, penalty was properly imposed.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the penalty and interest assessed under

Assessment Nos. 4103748-4103753, 4104147 and 4104148, and jurisdiction lies over the parties and

the subject matter of this protest.

2. The Taxpayer was late in paying gross receipts taxes due to the state, and interest was

properly assessed pursuant to NMSA 1978, § 7-1-67.

3. The Taxpayer was negligent in failing to report gross receipts taxes due to the state, and

penalty was properly assessed pursuant to NMSA 1978, § 7-1-69.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED September 1, 2004.

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